Update No. 279 – 15/09/16

The portfolio metrics based on 30 June 2016 balance date and 15 September 2016 prices:

My exhortation when last the portfolio metrics were provided (Update 258) hoping fellow investors would join me in adding to their positions turned out to be a prescient one. The intervening six months have seen an extraordinary uplift in the value of your EGP holding – more than 20% including the May dividend.

Interestingly, that same post suggested the portfolio was capable of an 18.5% gain over the next year if multiples held constant (you got it in half the time, showing why I’m generally reluctant to make forecasts!) my words were:

“I expect a weighted average profit growth of about 10-14% over the next 12 months. Given our weighted yield is 5.1% (franked to about 60%), our grossed up yield is about 6.5%. If my forecast of around 12% profit growth is correct, valuation metrics hold constant and the 6.5% grossed up yield is correct, the implication is for a return of 18.5% over the next 12 months”

Multiples actually rose somewhat. EV/E increased from 9.5x to 9.9 and P/E from 11.0x to 11.7x. This explains why the gain took 6 months rather than a year…

Perhaps the most notable change in the portfolio metrics is the decline in dividend yield from 5.1% to 3.8%. This is not a consequence of any planned strategy, but a consequence of two important factors. Firstly and most obviously, capital values of the portfolio have increased faster than the dividends. But secondly, a great portion of the recent portfolio additions have either been low-dividend payers or non-dividend paying. Clydesdale Bank is an example of this, it is a fairly large holding for the fund despite some recent trimming and a non-dividend payer at present, although dividends are set to commence soon enough. As I have mentioned often before, we do not search for a particular yield or capital growth when investing, but for the highest risk adjusted rate of return on our investment, whatever form that might take.

Weighted ROE again improved from 16.2% to 16.8%. This indicates both improving performance from our investee companies and a slight drift toward better quality companies of late. This is confirmed to some extent by the decline of NTA per dollar of market capitalisation from 82c to 70c. Better businesses tend to have both higher return on equity and fewer tangible assets backing the valuation of their business; our considerable position in Reece is an example of this.

Weighted market capitalisation increased from $769m to $888m; again this is a consequence of a couple of large cap additions. Our focus remains primarily in the small and microcap space, but as mentioned just 2 paragraphs back (and it can’t be mentioned too regularly!), risk adjusted return is the name of the game we play and we are agnostic in respect of such things as market capitalisation, simply seeking the best home for our capital.

Our median investee company remains awash with cash (remember – risk adjusted return! Take leverage out of the equation, reduce risk) and have very low capital requirements.

If I were to describe the changes over the last 6 months, as is my custom, I would say the portfolio is indisputably not as cheap as it was 6 months ago, but the underlying businesses are also improving at an improving rate. The fairly modest increase in various valuation multiples is therefore quite justifiable in our estimation. The portfolio remains meaningfully cheaper than the wider market, with brighter growth prospects, so we are hopeful we can continue to deliver outperformance regardless of the market direction.

In any case, since the recent switch to monthly intakes, my Wife and I have added at every month, and fully expect to continue until we run out of cashflow to do so…

If you want to look back through past ‘Portfolio Metrics’ posts (they’re issued around mid-March and mid-September each year since I began the concept), this link is a search for the term ‘Portfolio Metrics’ on the blog and will assist you in finding equivalent past posts – Tony Hansen 15/09/2016

P.S. For the first time, we are now more than 100% ahead of the market since inception. Thanks again to our investors for their continued support.

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit}

^{*2 calculated based on dividends reinvested}